Don’t tell Adam Knecht that the recession is over. Not when he’s standing at a makeshift construction table in the unfinished family room of The New American Home 2010, checking his cell phone at every vibration to see if his most recent attempt to secure a $1.8 million loan might come through that will enable him to complete the house.
Knecht is the general manager of Domanico Custom Homes in Las Vegas, a company started by his father-in-law that has a 30-year track record of producing high-end luxury homes in the valley. Nearly three years ago, Knecht and Ernie Domanico were asked to pilot the 2010 version of the industry’s longest-running annual show home program, The New American Home, in conjunction with this year’s International Builders’ Show.
Relying on a private financier—a common practice by Domanico Homes to fund its few spec luxury homes, which The New American Home would be—the builder broke ground in late 2007 on an empty lot within a nearly completed, nine-lot infill enclave of like-sized homes, one of which is owned and occupied by Ernie.
By February 2009, amid arguably the country’s worst economic conditions since the Depression and the worst housing market ever experienced in Las Vegas, the private financier pulled out of the project, leaving Knecht with a half-finished home and no strong traditional lending prospects.
Eight months later, with $400,000 owed to subcontractors and another $800,000 leveraged from the builder’s own coffers, work on the 6,100-square-foot show house all but ceased, the prospects for its completion by the Builders’ Show in mid-January 2010 dimming every day that the call Knecht is waiting for does not come.
The New American Home 2010 had already survived delays in the approval and installation of its insulated concrete form walls, rejection by the city of an innovative graywater recycling system, and an arson fire that engulfed a framed house on an adjacent lot. But it could not overcome an AD&C lending environment that has dried up in Las Vegas and across the country.
Record-setting bank closings, tighter regulations for real estate lending, and reappraisals that are less than the amount of outstanding construction loans have put builders nationwide out of business or on the brink of insolvency. “The only way to describe the [AD&C] market is horrible,” says David Ledford, NAHB senior vice president for housing finance and land development. “Even good projects can’t get money, and it’s hard to identify any patterns about the lending that is being done.”
In the case of The New American Home 2010, the construction lending crisis also will end a 26-year streak of show homes that have brought innovative design and product ideas into the national spotlight.
This year’s house, for instance, features a two-level floor plan by KTGY Group architects in Irvine, Calif., and Robert Williams, in San Clemente, Calif., that puts an extensive master suite and another guest suite and home office on the main level and a trio of suites and a “Man Cave” upstairs. Outside, an infinity-edge pool anchors an outdoor experience that was to include a full, sheltered kitchen and a contemplative garden, thanks to a design scheme by Summer/Murphy & Partners in Dana Point, Calif.
In addition, builders would have been enlightened about an aerated foundation system that mitigates expansive soil problems, an approach to building science that would reduce the home’s energy use by nearly 50 percent, and a waste management program that recycled or salvaged almost all of the construction debris generated on the jobsite.
Instead, the unfinished house highlights the issues facing a growing number of builders who’ve had their financing frozen, renegotiated, called due, or denied regardless of how well they are satisfying their loans or have performed in the past. “When our investor pulled out, we approached the local banks we’d worked with for years,” to finance the home’s completion, says Knecht. “But by that point [February 2009], they weren’t doing any spec-home financing.”
Projects such as The New American Home 2010, built on speculation with a price tag initially targeted at more than $4 million, says Ledford, are at the extreme end of the lending spectrum. Even so, he says, FDIC-led bank closures and regulatory pressure on lenders to get their real estate portfolios in line with federal guidelines imposed in 2006 have left AD&C financing in limbo across all price points. “[The situation] is preventing them from taking on any new loans at this point,” he says.
The immediate fallout, says Ledford, has left builders scrambling for other sources of money to either start or complete their projects. Knecht, for instance, has tried several tactics, from hard-money (or bridge loan) lenders seeking a 25 percent return to selling individual, $360,000 shares to attract a pool of smaller private investors to make up what he needs. He’s knocked on the doors of several local and national banks with various proposals—all without success.
In October, Knecht posed himself as the eventual homeowner to eliminate the stigma of a spec house, but the banks still didn’t bite. “There’s no urgency on their part and no clear or stated barriers or unanswered questions we can address,” he says, echoing many of his builder peers. “They’re working at their own pace.”
Recently, Domanico offered the house with a $1.8 million price tag, about half its most recent appraised value, to attract a buyer, finish the house, and get out from under it. “To keep doing this every single day with nothing to show for it is very stressful,” says Knecht. “I worry more each day.”
In many ways, says Ledford, the small, local banks that have been the backbone of private residential construction lending are handcuffed by tighter FDIC lending guidelines and a broadsword approach to freezing or calling in real estate loans, regardless of their performance. “I understand and don’t blame lenders necessarily,” says Bill Hoover, a Las Vegas home builder and 2009 president of the Southern Nevada HBA. “Lots of banks have failed, and if a home’s appraised value won’t pay off the loan, why lend?”
That scenario has played out especially in Las Vegas. Average home sales prices there have fallen 55.6 percent to about $119,000 from their peak in 2006 and to just 5 percent more than what they were selling for in 2000, according to the National Association of Realtors and the S&P/Case-Shiller Home Price Index. That’s the most significant decline of any city in the country, including Detroit, Phoenix, and Miami, and, according to Case-Shiller, is twice the national average home price decline.
With AD&C lending at a standstill, Ledford and others envision—and are pursuing—new sources of equity and credit for housing construction. “We’ll need other sources to fill the gaps,” left by traditional lenders unable to carry the same load, Ledford says.
Joint ventures similar to the “shares” that Knecht tried to sell, fee-build projects for banks with improved lots on their books (an opportunity that Hoover is tapping), gaining construction-to-permanent loans so the balance isn’t due upon the CO or closing, and simply building smaller, less-expensive homes that can be financed without a bank are among the short-term plays.
Longer term, Ledford can see a secondary market for construction lending, set up similarly to the mortgage loan model, that would pool small investors to make AD&C loans at less risk. “The terms would obviously be shorter [six to 12 months compared to 30-year mortgage loans], and a servicer would have to be in place to manage draws and verify construction progress,” he says. “It would allow more lenders, including mortgage lenders, into this market and increase competition.”
But that’s too far down the road for Knecht and The New American Home 2010, where kitchen cabinets and appliances are shrouded in protective foam sheeting and cardboard, showers are tiled around plumbing stub-throughs, and the infinity-edge pool in the backyard is a pit of rebar and white plastic pipes.
“The house is 75 percent done, not counting all the stuff sitting in boxes that we’re waiting to install,” he says, adding that subcontractors call about the status of their outstanding invoices as well as when or whether Knecht needs them back to finish the house. “Everyone’s itching to do something, to work long days to get it done [by IBS]. But there’s nothing else we can do.”
Alfresco Grills (outdoor kitchen design and products)
APEX Block (insulated concrete forms)
Broan-NuTone (bath fans/lights, Best range hood, central vacuum, ironing centers)
BSH Home Appliances (major appliances)
CEDIA (home automation coordination)
Closet Factory (custom closet storage systems)
Dal-Tile (ceramic and stone tile)
Dryvit Systems (Outsulation RMD cladding system)
DuPont Building Innovations (Zodiaq quartz surfacing)
Eaton Corp. (surge protection, AFCIs, load centers and breakers, structured wiring, A/C disconnects)
Emerson Electric (In-Sink- Erator waste disposers and hot water dispensers)
Escea (outdoor fireplace)
FBC Building Solutions/Lubrizol (FlowGuard Gold CPVC piping/fittings)
Formica (cabinet veneer details)
Generac Power Systems (48 kW standby generator)
Hearth & Home Technologies (fireplace coordination)
Icynene (spray foam insulation)
Kohler (plumbing fixtures, faucets, and accessories)
Lutron Electronics (lighting controls)
Mohawk Industries (wood flooring and carpeting)
ODL (tubular skylights)
Overhead Door (garage doors and openers)
Owens Corning (Cultured Stone veneer)
Portland Cement Association (support for concrete and masonry products)
Progress Lighting (lighting fixtures)
Regency Fireplace Products (fireplace)
Rinnai (tankless water heaters)
Schluter Systems (shower pan system and tile underlayment)
Seabrook Contract (Scandatex glass-textured wall coverings)
Sherwin-Williams (paints and coatings)
Sierra Pacific Windows & Doors (windows and patio doors)
Simpson Strong-Tie (framing connectors)
Timberlake Cabinets (cabinets and built-ins)
Trane Residential Solutions (split- system HVAC)
Travis Industries (Xtreme fireplace by Fireplace Xtrordinair)
Tyco Fire & Building Products (Blazemaster fire suppression system)
Uponor (radiant floor heating system)
Acrylic Tank Manufacturing (water wall fabrication)
Agilewaves (resource management)
Aztech Materials Testing (inspections)
Badger Construction (Cupolex and concrete labor)
Barefoot Pools (pool construction)
BioRoofSystems (green roof)
CIMA (NuWool cellulose insulation)
Desert Home Electric (electrician)
Doors in Motion (motorized door systems)
Eagle Framing (framing labor)
Eagle Roofing Products (roofing)
Earth Friendly Building Materials (APEX installation)
Elite Spray Foam (Icynene installation)
Executive Plumbing (plumbing contractor)
Foy Drywall (drywall labor)
Florian (solar panel racking system)
Hardin & Sons (septic system installation)
Ivie Mechanical (mechanical contractor)
Jose Alvarez Masonry (exterior stone and block labor)
JTG/Muir Corp. (solar water heater)
JMR Cabinets (custom tables and benches)
Las Vegas Flooring (tile and granite installation)
La-Z-Boy Furnishings (furniture)
Mechoshade (theater shading system)
Meridian Doors (interior doors)
Residential Fire Protection (fire suppression system installation)
Ossi Steel (steel and wrought iron)
Pontarolo Engineering (Cupolex aerated floor)
Prestige Roofing (roofing installation)
Red Rock Insulation (NuWool cellulose installation)
Sanyo EnergyUSA (photovoltaic panels)
Sonance (audio speakers)
Suntrek (solar integrator/inverter)
ThyssenKrupp Elevator (elevator)
Tom McSharry (window installation)
Trim Tech (interior carpentry)
Trufig Design (flush-mounted electrical controls)
U-Line (undercounter refrigerator)
Who-Dun-It Plastering (exterior stucco installation)